Choosing A New Company To Work For
You get a unique investment benefit when choosing an pre-IPO employer
Pre-IPO Employees Uniquely Get To "Invest" in a Company
It's reasonably well known within the tech ecosystem that the best startups don't typically have a hard time raising capital. It's in fact the opposite --> they frequently are over subscribed and turn away a large number of investors. Said another way, for the best startups, even many of the top VCs cannot invest.
But as an employee, you get the opportunity to "invest" via your stock comp grant. Sure, you haven't actually invested cash from your bank account, but your grant provides you with equity exposure to the company, which is very likely to increase (perhaps significantly) in value if the company continues to perform well.
It Pays (Literally) to Think of Your Employer as an Investment
At the risk of stating the obvious again, picking the right employer can result in a large increase in your net worth (via your stock comp). So when you're considering joining a new company -> it quite literally pays for you to consider the stock comp you will get as an "investment" and evaluate it on those merits.
We know most tech companies fail, so this is by no means an easy thing to get right. And even professional VC investors (and their investment funds) who do this for a living -> provide overall portfolio returns to their investors via a few "big wins" in the portfolio (with the vast majority being losers).
That said, it's arguable that there are some data points to consider that help increase your odds. For example, Pitchbook developed an AI-based exit prediction tool, researchers built a similar tool based on Crunchbase data, and some publicly available tools (e.g. Prospect) exist to allow you to sort and filter companies based on industry, location, investor, repeat founder, and more.
The data regarding what to look for isn't always clear (and it can change over time). But in addition to using and considering the tools above, a few key items to consider are:
Does the company have 1 or more top-tier VC investors? Top-tier VC investors tend to be more selective in their deals. As such, when they invest in a company it tends to raise that company's profile (and also helps open doors to other portfolio companies, if applicable).
Are the founder(s) repeat entrepreneurs with a prior exit (preferably a large one)? Building and growing a successful VC-backed company is hard and has a heavy failure rate. If one or more of the founders has done it before, they're battle tested and at a minimum likely know how to avoid making rookie mistakes.
What stage is the company at? Very early-stage companies can offer the most attractive potential upside, but companies that have at least raised their Series-B generally have better risk/reward.
Is the company's product a "pain killer" or a "vitamin." This is more subjective, but it's generally accepted that people and companies will more readily pay for something that solves a pain point of theirs (e.g. "pain killer") versus modestly improving things (e.g. "vitamin").
How do existing employees discuss the company and its growth/business performance. This is also subjective, but when you interview its common to ask your interviewers questions. How do they talk about their company and its growth/business performance? Are they excited and bullish? Do they discuss "growing too fast", or is it more "incremental"?
Both Company Growth and Exit Likelihood Matter
When you work for a Pre-IPO company, the potential reward is higher (the possibility of large company valuation increases), but so is the risk (probability of company failure or no return to common stockholders). And these two also very significant depending on the companies life stage (e.g. Seed, Series E). Fortunately, the team at Prospect conducted an analysis of 14,000+ startups from 2014-2015, providing some solid data-driven insight into the tradeoff between the two. We also supplement this data with alternate VC exit rate data we've found from other sources (to give you a range of exit rate estimates to consider; the two data points are from different analyses of Pre-IPO companies at different time periods).
Key Takeaway: If your new employer is a Pre-IPO company, its important to consider both company growth potential and exit likelihood. The data suggests that statistically, mid-stage companies (Series A/B/C) have the best overall outcome (exit percentage * average valuation growth).
Tax Strategies To Consider Where Applicable
There are more than 50 tax strategies that may apply to stock-based compensation in various scenarios. For a complete list see (50+ tax strategies). But when it comes to starting a new job and choosing a potential employer to work for, some of that strategies that are more likely to apply include:
You May Consider Exercising Your Options Earlier. Key Considerations/Strategies:
If You Need to Relocate for Your New Job, You May Want to Consider:
You're Unlikely to be With a Company for More Than 2 Years
The median employee Pre-IPO company tenure is under 2 years. This can surprise some individuals, and there are likely a number of reasons behind this. But in our experience speaking with hundreds (perhaps thousands) of tech professionals, the primary driver of this is economic: individuals want to work for a company where their stock-based-compensation grows significantly in value.
This, of course, seems like a "captain obvious" statement (e.g. everyone wants to "win the silicon valley lottery" and have their options be worth a lot of money), but the data is powerful in demonstrating just how common and acute it is. Said simply, talented technology workers can and will vote with their feet -> frequently moving from company to company to either:
(1) build a portfolio of private company stock options, or
(2) leave a sub-par company to find the next rocket ship.
Resources You May Consider When Researching
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